Investing,Mortgages & Loans,Property

What Are The Pros And Cons of Negative Gearing

22 Mar , 2016  

Nikhil (Nik) Sreedhar
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Nikhil (Nik) Sreedhar

Founder at ProAdviser
Nikhil's dream job is to be an exotic car salesman. His favourite colour is orange and it shows as he is the 23 year old entrepreneur behind ProAdviser. You should follow him, he gets lonely.
Nikhil (Nik) Sreedhar
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Within Australia, property investment has become very popular as these investments have been giving reliable long-term returns, increasing capital growth over 5% a year in different state capitals over the past ten years. Rent returns have also been substantial, at 3.4% for houses and 4.3% for flats. As you can see, investors have been receiving many benefits lately for their investments. With these great returns, Australians also receive the benefit of negative gearing (unlike other wealthy nations), which entails that the investor can claim a tax deduction if they have losses on the rental property. Thus, the opportunity to use negative gearing makes investing in a property very tax-friendly, and any losses from the property can be covered by personal income. It seems as though there are no downsides to property investment if you are covered by negative gearing. However, there are a few positives and negatives still to consider.

Negative gearing has attracted many Australians into becoming landlords, which can be an opportune way in gaining personal wealth. The attraction to property investment has also increased due to lower interest rates, yet in the midst of heavy investing, property prices have been rising quickly. This has then created more competition, especially for those that are looking for homes under $500,000. People who invest in these types of homes specifically are often first home buyers, which is why this under $500,000 bracket is so popular. Competition has also led to younger Australians to first become investors before becoming home buyers, which has increased investor activity even more so. However, because the number of investors has been increasing, renters have been reaping the benefits of lower rents with a greater choice of which properties to rent from.

There have been many conversations going around (especially in the media), that the government wants to get rid of negative gearing, yet because property investments are so popular, this seems very unlikely for now, as abolishing negative gearing altogether would be quite a dramatic leap. This is especially true, as recent events such as the changes in the federal government would offer a low possibility of negative gearing being discussed anytime soon.

However, while negative gearing is still available to investors, some seem to be investing in properties for the wrong reasons. The hope with negative gearing is that the property will eventually recover from the losses as the market continues to evolve.  Doing research beforehand and selecting a property with care and concern, as well as making sure you have enough income to cover any losses is important. Also make sure that your property investment is in a growth area. Without this type of research beforehand, you may be investing in a property with continual losses, and receiving only the tax benefits that go with it, and this would not be regarded as a successful asset. Your investment property will inevitably go through highs and low in terms of returns, but negative gearing is meant to soften the blow of the times of low returns in order to set-up the property for capital gains later. So make sure that you’re investing in a property more than for the possible tax deductions, but that you are investing to contribute to the market and to contribute to your own future.

The above notes do not take your personal circumstances into consideration. If you want to truly know if negative gearing is an appropriate strategy for you, please contact us and we will connect you to a qualified property specialist.

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